In Texas, there are situations where a life insurance company may rescind a policy. This means that the life insurance company not only denies a claim, but that it asserts that the policy will not be honored. Rescission is different from cancellation. Cancellation normally arises when premiums are not paid and the coverage lapses. Insurance companies normally seek to rescind a policy when there has been an alleged misrepresentation in the policy application.
Most misrepresentation issues involve an issue concerning an applicant’s medical history or health status. However, we have seen situations where applicants have made misrepresentations concerning age, finances, and incarceration or conviction history. Depending on the applicant’s state of mind, these misrepresentations can form the basis to rescind the policy and deny a death benefit claim.
Section 705.051 of the Texas insurance code defines when a misrepresentation can form the basis to rescind a life insurance policy. It states that a misrepresentation in an application for life, accident, or health insurance policy does not defeat recovery under the policy unless the misrepresentation is a material fact and affects the risks assumed. From this statute, courts have articulated three basic requirements that a life insurance company must establish to rescind a life insurance policy in the State of Texas. These requirements are:
- There was a misrepresentation made by the applicant.
- The misrepresentation was material.
- The misrepresentation was made with the intent to deceive.
In addition, Texas law enforces a two-year contestability period. This means that a life insurance company has two-years from the date the policy was issued to contest coverage on the grounds that the insured misrepresented a material fact to induce the insurance company into the issuing the policy. The law essentially gives the life insurance company a two-year window to investigate the insured’s medical background. Needless to say, life insurance companies typically seek to rescind a policy within two-years of it being issued, most often after the insured has died.
Misrepresentation to the Insurance Company
Before a policy can be rescinded, the insurance company must prove there was a misrepresentation. For legal purposes, a misrepresentation is the equivalent of an untrue or incorrect statement. There are many situations in which a policy applicant may be unaware of a medical condition. For example, a person may have diabetes or a heart condition that has not been diagnosed.
One situation that arises in the application process is an agent completing at least part of the application based on information informally gathered from the applicant. Sometimes incorrect information is included in an application that is completed online. In these situations the key question is if the applicant signed off on the application. If the application was signed, it is presumed the applicant understood its contents.
The Misrepresentation Was Material
The second requirement the life insurance company must establish is that the misrepresentation was material. Material in the life insurance context basically means that the fact or statement made to the insurance company in the application was relevant to its decision to issue the policy. For example, a broken collarbone as a child is less relevant than a current medical condition.
The insurance company’s underwriting guidelines are often important when determining if a misrepresentation was material. If an insurance company cannot demonstrate that a representation was relevant to its decision to issue the policy, then it should not claim a misrepresentation was material.
The Misrepresentation was Made With the Intent to Deceive
In addition to being material, the insurance company needs to prove that the applicant made the misrepresentation with the intent to deceive. If there is evidence that the applicant was aware that a statement made in the application was untrue, the Court often concludes that there was an intent to deceive. For example, an applicant who denies having a heart problem but is on hypertension medication and has regular checkups concerning his heart problems will likely be viewed to having deceived the insurance company into issuing the policy. However, a person who has an undiagnosed medical problem is likely to have the mental awareness to deceptively induce an insurance company into issuing a policy.
It is also important to recognize that court’s view recission as a harsh penalty that is not appropriate except where intent to deceive has strong factual support.
When an insurance company rescinds a policy, it is at the conclusion of an investigation into the applicant’s background and medical history. If your claim has been denied on the grounds of recission, you should consult with an attorney because your only likely legal recourse is through the courts. An insurance company that takes the rescission route has considered the possibility of legal action and has proceeded to deny your claim anyways. If you are dealing with a denied, delayed, or contested life insurance claim, call us at (866) 970-0977 to for a free noncommittal consultation with an attorney. We focus our practice on insurance disputes and handle most cases on contingency so